In 1861 Bagehot added a Banking Supplement and in 1863 a Budget Supplement. A year later he hired William Newmarch to compile an Annual Commercial History and Wholesale Price Index; and in 1868 he brought Robert Giffen on board to assist him in expanding coverage of the money market, including an Investors Manual, which cost an extra sixpence a month. By 1873, with the Economist itself at eightpence and circulation at 3,600, Bagehot could boast that the previous year ‘was the most profitable in the history of the paper’. He made the link between its financial health and that of the markets in a confidential memorandum to the Wilson family, who held the paper and other assets in trust. It was both a business plan and manifesto.
Since 1859 net income had increased from just under £2,000 to £2,765, with Bagehot’s salary at £400 plus half of all profits over £2,000 – giving him, on average, £780 since 1862. Yet trustees should never mistake this ‘delicate’ source of income for ‘funded property or land’, Bagehot warned, pointing to the 1866 financial crisis, after which profits declined.32 At first he had feared that competition from other business papers, nearly non-existent in 1843, was to blame. But he had changed his mind. ‘I believe it to have been owing to the dull state of the money market which was so motionless for nearly four years that there was nothing to tell the public about it.’ When trading volumes picked up again the Economist ‘recovered its position’, while the ‘other papers made nothing of their chance at all’. This he attributed to the fact that, as a member of Stuckey’s, ‘which always has large sums in London, I have better means of knowing than a mere writer what is happening and what is likely to happen.’33 Insider knowledge and a reputation for honesty (‘a reason why its management must never be left to a salaried Editor’, who might be bought off) set the Economist apart in the now crowded field of business journalism.
As for coverage, political analyses of the sort businessmen ‘would care to read’ were ‘a material support to the paper and strengthen its circulation’. ‘Indeed if politics were abandoned there wd. be a universal impression that the paper had changed its character and was going down.’ So far as profits were concerned, however, all subjects must be viewed in relation to changes in the money market, ‘because they affect all men of business, and all are anxious to see what will be their course’. What free trade and commercial legislation had been under Wilson, the money market would be for the era and editors that followed Bagehot.
The most remarkable change was not so much the sharper focus on finance, however, as the way this transformed the laissez-faire worldview of the Economist. Bagehot disliked the doctrinaire fanaticism he had found in the Economist in his youth, and as its editor showed a readiness to bend when it came to the basic principles of political economy. In 1871 he took stock of scientific developments since his youth – remembering Nassau Senior, and the school of political economy he represented, in a review of his journals. ‘I was myself examined by him years ago, at the time of the strict school, at the London University’, he wrote. ‘If it could have been revealed to him that persons of authority would dare to teach that profit had no tendency to become equal in different trades, – that the Ricardo theory of rent was a blunder and a misconception, – that it was unnecessary for bankers to keep a stock of gold or silver to meet their liabilities, but that they should buy gold in the market when they wanted it, I think Mr. Senior would have been aghast. Yet such is the present state of the science, and naturally the rise of the heresiarchs has diminished the dignity of the orthodox heads.’34
Up to a point, innovation was welcome. As an undergraduate Bagehot had registered his own doubts about the strict school, which included Wilson. Laissez-faire was ‘useful and healthy when confined to its legitimate function – watching the government does not assume to know what will bring a trader in money better than he knows it himself,’ he argued in ‘The Currency Monopoly’ in the Prospective Review in 1848. He continued:
but it is a sentiment very susceptible of hurtful exaggeration: in the minds of many at this day it stands opposed to the enforcement of moral law throughout the whole sphere of human acts: to the legislative promotion of those industrial habits which conduce to the attainment of national morality or national happiness at a sacrifice of national wealth: to efforts at a national education, or a compulsory sanitary reform: to all national aid from England towards the starving peasantry of Ireland: to every measure for improving the condition of that peasantry which would not be the spontaneous choice of the profit-hunting capitalist. Whoever speaks against these extreme opinions is sure to be sneered at as a ‘benevolent sentimentalist’: and economists are perpetually assuming that the notion of government interference is agreeable only to those whose hearts are more developed than their brains: who are too fond of poetic dreams to endure the stern realities of science.35
Wilson’s Economist was not only guilty of overstating the free trade case, it crudely caricatured any who asked ‘if there be no exception to it within the limits of political economy itself’. At twenty-two Bagehot thought he had uncovered such a case: government, not private entities, should enjoy a monopoly on coining precious metals and printing paper money – absent which, financial crises like the one just past in 1847 would be more frequent and severe.36 ‘It is a duty of a wise state to secure the mass of the nation against evils produced by the selfishness of individuals so far as it is possible: to bring within government control even the most limited causes of commercial convulsion.’37
Once editor, he nudged the Economist in the same direction. In 1861 the paper came out in favour of a permanent, graduated income tax, on the grounds that in its form at the time the tax failed to distinguish between different kinds of wealth: a barrister who earned £1000 annually was not as well off as a landowner or fund holder who earned that amount. ‘People with secure incomes are richer than people with only precarious ones.’ Fairness was an issue: ‘People think that the more rich should be taxed more than the less rich.’38 In 1864 the Economist reversed its earlier insistence under Wilson that all factory legislation, even to protect children from overwork or injury, amounted to an assault on free trade.39 The next year it endorsed state ownership of railways, comparing the plan to the penny-post reform, which ensured a cheap, efficient, national parcel network.40 Trade unions did restrain trade, but they were ‘real forces of the industrial world which the law did not make, and which it cannot unmake’; better to recognize them, with special laws to punish intimidation and sabotage by their members.41 Even women, after hesitations and qualifications, got some sort of break – though Bagehot’s admirers are stretching the truth when they call him an advocate of female suffrage. Votes for women on any wide basis was an absurdity that only John Stuart Mill took seriously, he wrote in 1865. Five years later, Bagehot was ready to concede only ‘a certain legal plausibility in the claim’ that unmarried female property owners might obtain the vote on the same grounds as men – even if he thought very little of the ‘political intelligence’ of the ‘spinsters’, ‘widows’ and other ‘lonely women’ that would exercise it.42
For all this Bagehot did not count himself among the ‘heresiarchs’: by showing greater flexibility he hoped to update laissez-faire at the Economist, not overturn it. In the part of Economic Studies he had completed by 1876, he celebrated the ‘wonderful effect’ of ‘English political economy’ since the publication of Adam Smith’s Wealth of Nations a hundred years before. ‘The life of almost everyone in England – perhaps of everyone – is different and better in consequence of it. The whole commercial policy of the country is not so much founded on it as instinct with it.’ Indeed, ‘no other form of political philosophy has ever had one thousandth part the influence on us,’ he went on, ‘its teachings have settled down into the common sense of the nation, and have become irreversible’.43 Bagehot criticized newer rivals to this ‘English-school’ of political economy: on the one hand, the ‘enumerative’ or ‘all case method’ of the German Historical School; on the other, the neo
-classical or marginal revolution that was just starting to take off. ‘Mr Jevons of Manchester, and M. Walras of Lausanne, without communication, and almost simultaneously, have worked out a “mathematical” theory of political economy’, Bagehot wrote of the latter school; ‘and anyone who thinks what is ordinarily taught in England objectionable, because it is too little concrete in its method, and looks too unlike life and business, had better try the new doctrine, which he will find to be much worse on these points than the old.’44
Bagehot’s mission as Economist editor was to teach a common sense science of political economy, ‘the science of business’, whose chief merit was its ability to adapt to changing circumstances – in his era, the increasing weight of global finance in Victorian capitalism. Export of capital on a large scale was a new phenomenon in Britain, coinciding with Bagehot’s career: from low levels of 1 to 1.5 per cent of gross national product in the forty years prior to 1850, average net foreign investment leapt to 2.1 per cent in the 1850s and to 2.8 per cent in the 1860s; and as Bagehot foresaw, it kept rising, averaging 4.3 per cent between 1870 and 1913, at which point net overseas assets accounted for 32 per cent of national wealth – a larger share than for any country before or since. If the surpluses for this boom arose in part from Britain’s early industrial monopoly, it soon developed dynamics of its own.45 ‘Banking in England goes on growing, multiplying, and changing, as the English people itself goes on growing, multiplying, and changing. The facts of it are one thing today and another tomorrow.’46 ‘England has become the settling place of international bargains much more than it was before’, he observed. ‘But whose mind could divine the effect of such a change as this, except it had a professed science to help it?’ A new wave of investment in ‘half-finished’ and ‘half-civilised communities’ flowed abroad. ‘Who can tell without instruction what is likely to be the effect of the new loans of England to foreign nations?’ Such easy access to credit, and on a global scale, was unprecedented in human history. It fell to Bagehot’s Economist to map this new world, tracing the theoretical insights of political economy to the people and places men of business were sending their money.47
Central Banking Rules
It was in the halfway-house between theory and practice that Bagehot made his contributions to financial history, where the legacy of his editorship was the construction of a role and set of rules for central banking in the age of global capital. On these matters, his opinion carried great weight. Gladstone dubbed him a ‘supplementary Chancellor of the Exchequer’ and consulted him on policies such as the Bank Notes Issue Bill, with Bagehot promising ‘the entire assent and substantial support of the issuing bankers’.48 Contemporaries credited him with inventing the Treasury Bill in 1877, when he advised Gladstone’s successor as Chancellor, Sir Stafford Northcote, to replace ‘Exchequer Bills’ with a modern, easily traded instrument, to ‘resemble as near as possible a Bill of Exchange’. ‘The Treasury has the finest security in the world, but has not known how to use it’, Bagehot explained privately. ‘Such a Bill would rank before a Bill of Barings.’49
The Economist was the source of this authority as well as the most important outlet for his views on bringing stability to the financial system – which by all accounts needed more of it: crises were frequent, either beginning in the City of London or passing through it infinitely magnified, as the spoke around which international finance now turned. At home, the panic of 1866 was among the most spectacular, dominating Economist coverage of the money market long afterwards. In that year one of the City’s great wholesale banking houses, Overend, Gurney & Co., failed soon after it had raised large sums by incorporating as a company with limited liability. After the stock market crashed, a bank run ensued. For Bagehot, the episode demonstrated beyond a doubt that the Bank of England, which at first refused to intervene, was unlike all other banks and discount houses, and Bagehot told Gladstone as much during the crisis, over breakfast on 31 May.50
Bagehot also developed this argument in countless Economist leaders, distilled into a standalone book in 1873, Lombard Street. Since it was backed by government and held the nation’s reserves, the Bank of England had an important duty. When credit dried up during a crisis like the one that felled Overend, Gurney & Co., it must act as lender of last resort, until confidence returned, using two guiding rules: advances must be at a ‘very high rate of interest’ and made on ‘all good banking securities’, thereby limiting the bailout pool to ‘solvent’ but ‘illiquid’ banks, and encouraging rapid repayment.51 The Bank of England’s directors were ‘trustees of the public’, whose actions had a major effect in and beyond Britain. ‘A large deposit of foreign money in London is now necessary for the business of the world.’ Yet this also meant that a rush to withdraw by foreign individuals, businesses or states could determine ‘whether England shall be solvent or insolvent’.52 The Bank of England would require larger reserves in the light of the vast new scale of British financial commitments and could no longer be governed by an elderly bench of part-timers, drawn from a class of reputable but amateur City merchants.53
The French answer was nationalization. That, obviously, would not pass muster with the English. Such a move also had the demerit of exposing government to criticism in a crisis, or subjecting policy to political pressure, ‘as chance majorities and the strength of parties decide’.54 In an ideal world, he conceded in Lombard Street – with a nervous glance over his shoulder at Wilson – the Bank of England would not even exist. Like any other trade, state meddling harmed the banking business. ‘The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.’ Since it did exist, though, better not to upset markets by any too-radical change. ‘You might as well, or better, try to alter the English monarchy and substitute a republic’, he added archly. Yet the analogy between the function of credit and that of a constitutional monarch was deliberate – and revealing. Bankers had faith in the Bank of England as implicitly as ‘Queen Victoria was obeyed by millions of human beings’.55 There was no good reason to accept either, in other words.
But since people did believe, and their belief was essential to the smooth running of the banking and political systems, Bagehot looked to the monarch as a model. The appointment of a permanent deputy director to the Bank with the requisite experience, sitting under a rotating, ceremonial governor, would ensure consistency and independence enough to instil confidence in the nation’s credit. But where to find the deputy? The custom by which bankers were excluded from the Bank’s governing body dated from an era in which all banks, including the Bank of England, were in competition. ‘This is a relic of old times.’56 Now bankers could work together, and as the principal depositors, with an interest in a large reserve to safeguard their assets, they were ideal candidates.57 The point was to remove the old commercial oligarchs from the board of the central bank as well as any threat of parliamentary interference. Major powers – to set interest rates, determine and maintain adequate reserves, and to bail one another out in a pinch – would fall to the bankers themselves.
For Bagehot, banking was the mirror image of politics. Both depended, in the final instance, on a powerful illusion from which everyone benefited – even if only a discerning few were able to chuckle about it. In his lifetime better known as a banker (Lombard Street took just three years to reach a sixth edition), Bagehot is more widely read today for what he had to say about the other side of this looking-glass. His writings on the English Constitution represent just a small sample of his political output, however. The Economist took him further afield, towards two political systems that contrasted with Britain: Louis-Napoléon’s imperial dictatorship in France, and the partisan democracy in America. By the 1870s both France and the US were just beginning to challenge the monopoly Britain had enjoyed over industrial production for the world market, while entirely new nation-states appeared alongside them, in Germany and Italy, whose leaders sought to unleash the productive forces latent in their o
wn societies. The Economist cheered these developments, which would require ample investment capital to be realized. But it also identified a new problem, thanks to Bagehot, on which its comparative political judgments of them hinged. In an age where new and older nation-states were attempting to play catch-up to Britain, in part with British capital, the role of political institutions in fostering this growth – or hindering it – became pivotal; and for Economist readers, a way of evaluating the potential return on their investment, and its security. Historians have noted how this wave of capital transformed the world economy – pushing frontiers of food cultivation in North America and Eastern Europe, cotton production in India, mineral extraction in Australia, ranching in Argentina, and railways nearly everywhere, cheapening the transport cost of all these goods.58 Fewer have remarked on the form of liberal politics that was its corollary, and which had no clearer tribune than Bagehot’s Economist.
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